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Thread: Low yields.

  1. #31
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    Are you saying that bond redemptions can adversely affect the value of the holding of those still in the fund? Seems wrong, that that should occur that is.

  2. #32
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    Quote Originally Posted by Nor View Post
    Are you saying that bond redemptions can adversely affect the value of the holding of those still in the fund? Seems wrong, that that should occur that is.
    If you are investing in a 'closed fund' that is accepting no more new money from clients then 'no'. Because redeeming money from such a fund is just selling your existing fund units to someone else.

    HOWEVER, the picture changes if you are investing in an open fund such as NZB that has no limit on the extent of cash contributions. In that instance, then the answer is 'yes'. If you wish to withdraw units from NZB in the current market at short notice (as all withdrawal notifications are), then it is very likely some bonds will have to be sold at a loss to meet your repayment demands. Fortunately you personally do not suffer the burden of that loss alone, because the burden of that loss is spread over all the unit holders in the fund. This means that you personally get your money out shouldering just 0.0001% of that loss (0.0001% being the value of your holding sold in proportion to the total value of the fund) whereas the rest of the loss (99.9999%) is shared around the unit holders that remain. It is an example of fund management with a 'communistic tint', where all losses are shared equally.

    Very good for you if you want out. Perhaps not so good for those who remain. But the losses you caused to others by your 'sale demand' only affect their balances by a 'tiny bit'. Perhaps half a cup of coffee per year? And since coffee isn't that healthy for you anyway, it is probably best if you think of yourself as providing a 'health benefit' to others by selling out. You, as a seller, are a 'national health hero' improving the health of a whole nation (or all the other unit holders at least). Doesn't that make you feel good?

    SNOOPY
    Last edited by Snoopy; 25-08-2023 at 01:05 PM.
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  3. #33
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    With these funds you can buy and sell on market but also invest and withdraw directly. For why I wonder.

  4. #34
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    Default The mystery that is NZB (Smartshares NZ Bond Fund)

    Quote Originally Posted by Nor View Post
    Why is the Smartshares bond fund NZB paying such low dividend yields, about 1.6%? I would have thought their price should have gone down and yield up to approximate current rates.
    Some more reflections on your original question Nor.

    How do you find out what is going on inside NZB? Ideally you would look at the fund prospectus or the commentary in what look like quarterly fund updates to determine this. But I have done so and this information is not disclosed. Also 'not disclosed' is what happens to the fund income received net of fees that is not paid out in dividends. Is it reinvested? Or does it go into the ANZ cash account? We don't know, and there is no way given to find out. We do know the strategy of the NZB fund from the original 2015 prospectus though:
    "To outperform the S&P/NZX A-Grade Corporate Bond Index over a rolling three-year period."

    But what is the managers' operational strategy to try and achieve this? We aren't told. Why has the fund seemingly under-performed its benchmarks in 2017, 2018, 2019, 2020 and 2023? We aren't told. Finally if you ring the fund manager up to clarify some of these points, you get told to submit your query by e-mail. This I did. But I never got a reply.

    This leaves any investment in Smartshares NZB to be very much a 'guessing game'. So I make no apology for making some of my own guesses to try and understand what is going on inside the NZB fund.

    SNOOPY
    Last edited by Snoopy; 26-08-2023 at 07:26 PM.
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  5. #35
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    Default How has NZB outperformed the bond market so far in 2023? Part 1

    Look at the 'comparative bond' 'market interest' charts that I have identified (ABB110, AIA240, ARG020, CEN060, CCH030 - refer to post 30). Check the timelines from the start of February 2023 to August 2023. All are rising steadily (i.e. the underlying capital bond values are falling steadily). Yet, over the same period NZB, charted on a 'whole of fund valuation basis', is largely flat. This could indicate that as a rule (except for the few bonds that were actually sold), the constituent bonds that make up NZB are not being 'marked to market'. How could NZB get away with this? Well, the NZB fund has an indefinite life. So as long as the constituent bonds were held to maturity (i.e. not sold on the way), that means the NZB fund would eventually get its capital back, - even in a falling bond market. And that, in turn, means the need to 'mark to market' as part of a reporting procedure might disappear. Note that I am not saying this definitely is happening. I am merely raising the 'not being marked to market' idea as a possibility.

    As an indicator of the NZB pull back we might have expected, between February 2023 and August 2023, -the pull back that didn't happen- we can gauge what I would have expected to happen, by looking at the ABB110 bond over that same 'time frame of concern'. The underlying interest rate of our reference bond ABB110, rose from 4.9% to 5.8% over our time period of interest. This represents a capital reduction of (1-(4.9%/5.8%))= 15.5% over the February 2023 to August 2023 period.

    What is it that has allowed the NZB price to hold up in the wake of such bond market turmoil? I can think of three possible mechanisms, the first leading on from what I have just discussed.

    This first suggestion, (I have already made) is that NZB does not 'mark to market' their constituent bonds (except for the subset of those bonds sold before maturity). This is a conjecture of mine (even if it doesn't seem likely). It is one possible reason why the change in value of NZB -seemingly- has not followed the direction of its constituent bonds.

    SNOOPY
    Last edited by Snoopy; 27-08-2023 at 10:02 AM.
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  6. #36
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    Default How has NZB outperformed the bond market so far in 2023? Part 2

    A second possible reason is the new money which came into the fund to purchase new fund units (and hence underlying bonds) at an undiscounted price, offsetting losses from the existing investments in the process.

    At the start of February 2023, there were 116,927,077 NZB units on issue. This unit total on issue had risen to 145,073,077 (+24.1%) units towards the end of August 2023. The incremental increase of units supplied to the fund ( 145,073,077-116,927,077= 28.146m ) resulted in approximately 28.146m x $2.86 = $80.5m of net new investment capital flowing into the NZB fund between those February and August dates. Note that these new incremental shares represent 19.4% (say 20% round figures) of the now combined total.

    Here is where the slightly tricky reasoning comes in. If 20% of the units now on issue have been issued at a 'premium price' (actually the market price of say $2.86), that means 80% of the benefit of this new money will go to existing investors in NZB, as this 'new money' is 'pooled together' within existing funds.

    My previously calculated (post 35) 15.5% reduction in fund value (the possibly undeclared reduction in bond value from February 2023 to August 2023 I talk about in post 35) for 'existing bond holders', from the February 2023 'declared AND underlying value of $2.88', represents:
    0.155 x $2.88 = 45cpu.

    This means the value of our existing NZB units reduces down from its February 2023 value to:
    $2.88 - $0.45 = $2.43 (as of August 2023).

    Now we do the weighted average calculation reflecting the mix of old and new funds. This means that following the 'cumulative accumulation of new funds' at an estimated $2.86 average price between February 2023 and August 2023, the average underlying value per unit of all funds at NZB is now:
    0.8x$2.43 + 0.2x$2.86 = $2.52

    This means the 'new funds' have resulted in the recovery for earlier unit holders of up to $2.52 - $2.43 = 9cpu of value, an amount some external observers may have considered lost. Nevertheless while helpful, the 9cpu of value recovered from 'new investment' does not fully recover the suspected 45cpu of existing unit holder 'unit value' lost from wider market interest rate market movements.

    SNOOPY
    Last edited by Snoopy; 27-08-2023 at 10:12 AM.
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  7. #37
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    Default How has NZB outperformed the bond market so far in 2023? Part 3

    A third reason why the value of NZB is holding up could be retained earnings from from the balance of income from fund constituents, (less management fees of course), that has not been not paid out.. Using the quoted fund yield of 5.59% as at 31st July 2023, an actual calculated gross yield payout percentage number of 1.6%, a tax rate of 28% and a management fee of 0.54%, we can estimate the half year retained fund income that remains available for reinvestment as follows:

    1/2 x (1-0.28) x (5.59%-1.6%-0.54%)= 1.24% (return on assets under management)

    This represents a net retained income stream by NZB of:
    0.0124 x 116.927m x $2.86= $4.15m

    This is equivalent to $4.15m / 116.927m = 3.5cpu

    If we make an alternative assumption, contrary to what I wrote earlier in 'post 35', that NZB does mark to market the value of their constituent bonds after all, do reasons 2 (post 36) and 3 alone provide enough new capital into NZB to keep the NZB unit price stable against a background of falling bond fund constituent prices?

    3.5cpu + 9cpu = 12.5cpu, a figure well short of the 45cpu that I determined was likely lost. The answer therefore is 'no', Operational assets recovered, combined with the documented new capital injection, cannot make up for the observed capital loss effect of rising interest rates observed in comparative bonds.

    As Sherlock Holmes would have said, by eliminating the likely explanations of a phenomena, then the explanation(s) that remain, however unlikely they may seem at first glance, are probably true. Thus unless I have missed another obvious explanation (which may be the case, because I am not Sherlock Holmes), it does seem that NZB are not marking their constituent bonds to market!

    I invite any budding Sherlocks out there to prove me wrong. I hope you can!

    SNOOPY
    Last edited by Snoopy; 27-08-2023 at 10:17 AM.
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  8. #38
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    Default How has NZB outperformed the bond market so far in 2023? Part 4

    Quote Originally Posted by Snoopy View Post
    I invite any budding Sherlocks out there to prove me wrong. I hope you can!
    I am putting my paw up to claim my own prize. I found the following statement(s) on p32 of the NZB/NZC/NZG fund prospectus, with the piece on derivatives of particular interest.

    ----------------------------------

    Interest Rate Risk

    All of the Smartshares Funds will invest in some products that pay a return based on interest rates. In some cases the products that a Smartshares Fund has invested in will have floating interest rates. Floating interest rates can change due to general market conditions or conditions specific to a particular industry sector or issuer, and such changes could affect the returns on such products and thereby affect the value of the relevant Smartshares Units.

    In other cases the products that a Smartshares Fund has invested in will have fixed interest rates. Although the returns paid on such products stay fixed, the value of an investment in fixed interest products is not fixed, and will fluctuate as a result of movements in market interest rates. For example, if market interest rates rise, an existing fixed interest rate investment may become less valuable (or in the case of declining market interest rates; more valuable). This is because a fixed interest product becomes less desirable (and therefore less valuable) when other products with higher interest rates become available.
    Factors that affect market interest rates include global and domestic governments’ economic, monetary and fiscal policies (including decisions made by the Reserve Bank of New Zealand, or another jurisdiction’s central bank), inflation, economic expansion or contraction, liquidity and crises including political and banking.

    --------------------------------------

    I have to be careful in my interpretation of what is being said here. The above excerpt certainly says that the fund managers are aware of how changes in market interest rates can affect the capital value of the underlying bonds held by NZB. But it does stop short of saying that any wider market interest rate movement will automatically be adjusted at market close. In fairness NZB may just be 'covering themselves'. Because it is likely that not every bond they hold trades every day. And that means the price of the NZB units as traded my not reflect the change of the interest rate shadow on all of the fund constituents immediately. Nevertheless I have learned to read these prospectuses carefully concentrating on what was actually said, rather than extrapolating to what *I* think is a logical conclusion to what was said. Given this, I don't think this information rules out my conjecture from post 35.

    --------------------------------------

    Derivatives Risk

    Derivatives are contracts between two parties that usually derive their value from the amount or value of an underlying asset, rate or index. Derivatives may be used by a Smartshares Fund to gain, reduce or modify exposure to foreign currency, interest rates or credit. The use of such products to gain exposure is often a leveraged investment, and may cause a Smartshares Fund to incur significant gains or losses in proportion to the value of the investment, thereby causing Returns to become more volatile and increasing the risk of any loss.

    ----------------------------------------

    That information on derivatives sounds pretty scary. But could it be the manger at NZB knew interest rates had fallen to an historic low and hedged against the effects of interest rates rising again? That would be a pretty big call as fund managers typically do not go 'all in' over such bets. But in theory this is a fourth way that NZB could have constrained their losses. Well done Sherlock.

    SNOOPY
    Last edited by Snoopy; 27-08-2023 at 07:57 PM.
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  9. #39
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    Quote Originally Posted by Snoopy View Post
    We do know the strategy of the NZB fund from the original 2015 prospectus though:
    "To outperform the S&P/NZX A-Grade Corporate Bond Index over a rolling three-year period."

    But what is the managers' operational strategy to try and achieve this? We aren't told. Why has the fund seemingly under-performed its benchmarks in 2017, 2018, 2019, 2020 and 2023? We aren't told. Finally if you ring the fund manager up to clarify some of these points, you get told to submit your query by e-mail. This I did. But I never got a reply.
    Perusing the 2015 NZC/NZB/GBF prospectus, I see that both NZC and NZB are managed by 'Nikko Asset Management'. Perhaps that is why Smartshares never replies to my questions about how the NZB fund operates? If they have outsourced their NZB management to Nikko, they may not know.

    SNOOPY
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